Daily Market Reports | Nov 09 2010
By Greg Peel
The Dow fell 37 points or 0.3% while the S&P fell 0.2% to 1223 but the Nasdaq gained a point.
It's no stretch to appreciate that US QE2 has rather dominated the headlines and global market perception recently, but now that that announcement is behind us, we can return to focusing on everything else which has been going on in the world in the interim.
Fears over European debt problems had not only taken a back seat, but had subsided somewhat further given the ECB has been busy unwinding its emergency monetary support at a time when additional monetary stimulus decisions have been centre of attention in the US, Japan and the UK. Even the RBA had noted in the minutes of its October monetary policy meeting that it “couldn't wait forever” to see whether an implosion in Europe was still possible, and last week's rate rise showed the RBA had become sufficiently confident.
The good news on the European front is that the Greek local elections held over the weekend saw the ruling party hold its ground. The fear was that the incumbents would suffer a backlash over their strict austerity measures, and the Greek prime minister had threatened to call an early general election were the protest vote to be overwhelming. Clearly the majority of Greeks understand the situation they're in.
Greek sovereign debt spreads nevertheless remain elevated, but last night the focus was on Portuguese and Irish spreads which blew out once more to new records.
The Portuguese government is struggling to get its austerity measures passed through parliament given an Opposition which is seizing the opportunity to whip up populist protest. Sound familiar? But for Ireland, the problem is not one of passage of legislation but the implications of that legislation. Ireland has been forced to make very severe budget cuts. While these will help reduce the budget deficit, there comes a point where the negative impact on economic growth negates the effect of the cuts because, for example, tax income also falls.
The fear is that Ireland is stuck in a lose-lose situation from which it cannot recover. Ireland has thus now overtaken Greece as “most likely to default” without outside assistance from the ECB, EU and/or IMF.
The credit spread blow-out saw the euro take a tumble last night, falling close to 1% to be back under the US$1.40 mark. The US dollar index rose 0.6% to 77.04 as a result. The Aussie slipped a bit to US$1.0130.
A stronger greenback would typically mean a lower gold price, but not if Europeans are bailing out of euros back into the protection of the new found global reserve currency. Gold rose US$13.90 to US$1408.20/oz to breach the US$1400 mark for the first time. Silver jumped 3.7%.
Silver is the dual personality metal and last night it had its precious metal hat on rather than its industrial metal hat. Base metals in London were mostly around 1% weaker while oil managed to rise US21c to US$87.06/bbl.
Wall Street commentators are not at all surprised that a bit of profit-taking has come into the stock market following the general euphoria of QE2. Last night's European wobbles provided a reasonable excuse.
This week's round of US Treasury bond auctions was always going to be an interesting one. The US bond market had already been said to be bubbling even before talk of QE2 emerged and buying continued in earnest as the Fed began to hint of QE2. Now that the market knows the Fed has US$600bn of bonds to buy, on top of its rollovers, it seems a bit pointless to sell bonds. “Don't fight the Fed,” goes the saying. But conversely, is there much point in buying bonds at these elevated levels?
Last night's auction of US$24bn of three-year bonds saw the Treasury having to settle on a higher cost of debt than last month. The settlement yield of 0.575% was slightly above last month's record low 0.569% and foreign central banks bought only 35% compared to a running average of 38%.
Tonight it's tens and on Wednesday it's thirties. The ten-thirty yield spread has now blown out over 1.5% which is a record. This is good news for banks, but the elevated spread also provides evidence of ultimate inflation fear post the QE2 (and QE3?) stimulus.
The SPI Overnight fell 18 points or 0.4%.
Today in Australia sees the release of NAB's monthly business confidence survey.
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